Signals: High interest rates? No problem for Robinhood in Q1 2023 earnings

What’s true for Robinhood is likely to be true for many fintechs, which is why sector participants and investors look closely when the company reports its earnings.

Last week, the company made its first quarterly showing of the year—one which was lifted by a $6.3 billion dollar cash position, high hopes for its new retirement product, and anticipation surrounding an advisory product.

In total, Robinhood generated $441 million in revenues in Q1 2023:

High interest rates have not gleaned a reputation for creating the most lucrative financial markets. Yet, they were key to unlocking Robinhood’s 47.5% increase in year-over-year revenue.

However, we need to go deeper than numbers to understand what is going on with this fintech royalty. To dive deeper, we read the company’s 108-page quarterly filing so that you didn’t have to—and here are three things you need to know:

After a banner performance in 2020 and 2021, cracks formed in the foundation of Robinhood’s ‘democratization’ dreams. Speculative, young investors left the party—and they took the company’s sky-high revenue with them.

Why did they leave? Well, because the last three years made geniuses out of anybody participating in the markets. That was, at least, until the music stopped. In 2022, Robinhood investors lost over $54 billion of their own money, or over a third of the entire platform’s AUC. This was observably worse than other broker-dealers.

There was some gold at the end of the rainbow, though: Robinhood investors began to swap speculative fare—including penny stocks related to electric vehicles and cannabis—for larger, more established ‘big index names’.’

Stocks like Google, Berkshire Hathaway, Shopify, and Target rose in popularity with investors. However, Robinhood’s gradual rollout of ‘Robinhood Retirement’ shifted the tides the greatest: Five of the 12 new members in the Robinhood Top 100 were index ETFs. What’s with the change?

Product steering.

When Robinhood users open a Traditional or Roth IRA, they go through an onboarding process that helps them build a portfolio:

This steering has helped Robinhood begin to reorient its COVID fervor toward a long-term, sustainable direction.

To aid in that transition, Robinhood has reprioritized where it sends its money to work. Instead of continuing to spend on marketing, which was already one of the company’s strong suits, it began to pay its existing cohort of investors to save for retirement through a feature it calls ‘IRA Match.’

Getting paid to save might give users with an impasse attitude about long-term saving a pertinent and present motivation—and it might be an important onramp for another one of Robinhood’s new ambitions.

But above all else, Robinhood’s retirement product might be one of the most innovative to come out of fintech in years—it has the right level of handholding, a beautiful onboarding flow, and a low barrier to entry. You can set up a daily purchase of an ETF or stock from as little as $1, something that I’m not aware exists anywhere else.

In spite of the excitement, Robinhood Retirement is still in its early days; it has yet to have a meaningful impact on the company’s AUC or transaction revenue. It is hard to know whether it will find traction with its already-captured base of users.

Robinhood might be on the right track with Robinhood Retirement—but it’ll need a bridge to getting there. Thankfully, higher interest rates are offering Robinhood just that.

Robinhood has relied heavily on transaction-based revenues, which are generated when users trade stocks, crypto, and options. During the COVID-19 pandemic, and the financial fervor it created, the company rode the boom times. It hired and grew in anticipation of more banner performances like the ones it experienced during the meme-induced trading that swept markets in the first half of 2021. During that time, it generated nearly $900 million dollars in transaction revenue.

That performance helped Robinhood gear up for its own IPO, but its ‘boom times’ were an outlier—and one which it modeled its future upon. This resulted in downsizing and reorganization, which was reflected at many tech companies, arguably wholesale benefactors of the pandemic. After all, Robinhood still makes a lot more money now than it did before the pandemic.

However, Robinhood has struggled to grow its transaction revenue in 2023. Instead, almost all of its revenue growth has come from higher interest rates, the very thing that was instrumental in derailing the market mania.

In 2021 and 2022, transaction revenues represented more than 70% of the business’s revenue. In Q1 2023, the opposite is true—in a first for the company, its transaction revenue was marginally smaller than its interest revenue.

That means Robinhood made more than half of its revenue, $208 million in total, from interest. Here’s how it breaks down:

This would be a great tailwind for Robinhood, which has passed along higher interest rates to users through its cash sweep program. It isn’t though, in large part because high interest rates are as much an aberration as the company’s banner COVID quarters.

Interest rates will inevitably fall again at some point, which means that Robinhood still is looking for another way to squeeze some juice out of its well-oiled, albeit predictable, machine. It thinks it might have the answer in advisory services, 24-hour trading, and futures trading.

On Robinhood’s year-end 2022 earnings call, CEO Vlad Tenev indicated that Robinhood had aspirations to expand its retirement product into advisory services. They reiterated that goal this quarter.

However, given the ‘newness’ of Robinhood’s retirement product, there’s not a whole lot of assets there for advisors to manage. This is one reason why Robinhood launched a promotion towards the end of Q1 offering to match 1% of any qualified account that users roll over into Robinhood’s retirement product.

To pay for that 1% match, they pivoted away from acquisition and focused on retention. In other words, they paid their ‘highest-value users to come to Robinhood’s retirement ecosystem—and they’ll have to stay for awhile as a result, as the condition of accepting the 1% match is that your money has to stay there for at least five years.

The company says they attracted more than $500 million in contributions to Robinhood Retirement, which would be a huge step towards launching a successful and “personalized advisory experience at a much lower price point than traditional advice.”

Robinhood also fed the remainder of their base—the self-professed degens, crypto traders, and active traders. They’re not flourishing in the way that they did during the days of 0% interest, but the company is offering a carrot in the form of futures trading and 24 hour trading on individual stocks.

Ultimately, Robinhood is expanding the optionality of its product, but its recent changes reflect a desire to achieve greater dominion of its over 11 million monthly active users’ assets and financial lives. Robinhood users skew younger—in 2022, the company said its average user is 32 years old—and that can be ascribed to the lack of experience which cost its investors billions.

In the grand scheme of things though, 32 is still young. Many Americans don’t break the bank for retirement or investing until their late 30s and early 40s. It’s fair to say Robinhood hopes to capture the next wave of wealth.

Robinhood has made significant strides with its business over the last year. COVID was good to the company, but to survive, the company has redirected large portions of its business. It has honed in on its core user, laid off thousands of employees, and cut back in more places than one.

This is a theme that is taking hold across many fintechs and investing companies. In spite of that, there are still some interesting takeaways to dig into that are abreast of Robinhood’s own ‘big themes.’

As Robinhood came back to Earth, it made difficult cuts— laying laid off over 1,000 people (according to data from layoffs.fyi) and shuttering a few offices to reduce overhead across departments.

In Q1 2022, Robinhood reported that employee compensation totaled $225 million. In Q1 2023, it’s $143 million.

That’s a 36% decrease, and the cuts can be directly ascribed to downsizing in technology and development, operations, and marketing.

Robinhood also has fewer lease assets, and what they have to say about said leases is a lot lighter in their latest statement than this time last year. Back then, they were looking at total lease liabilities of $183 million—and those liabilities spanned many years into the future (they indicated that their weighted-average remaining lease term was 7.74 years).)

By contrast, in Q1 2023, their lease liabilities are lighter. It’s a function of both time passing (and leases being paid) and Robinhood parting with two offices as part of their downsizing efforts. They had $143 million in total lease liabilities remaining.

However, over what time horizon was harder to discern—but they had $23 million in current operating lease liabilities, mostly at their Menlo Park and New York City offices.

Downsizing aside, Robinhood looks like it’s back to hiring for ‘mission critical’ tasks, including writers for its new media venture Sherwood Media.

Everybody remembers GameStop, right? Well, angry Robinhood investors sure do—and it’s still a thorn in Robinhood’s side. The company has been fighting claims that it harmed investors or failed them, particularly with regard to customer support and outages.

Robinhood settled with state regulators in Alabama, California, Colorado, Delaware, New Jersey, and South Dakota in matters relating to “customer communications and displays, options and margin trading approval” along with the March 2020 outages and “customer support.”

Even more recently, in January 2023, more than 4,700 customers filed with FINRA to initiate arbitration of individual claims relating to GameStop.

It doesn’t stop there, though. Robinhood has been in and out of court fighting a number of other matters. Here’s just a taste of the six-page long section relating to the company’s legal and regulatory matters:

I’ll qualify that I’m not sure if this level of litigation against a broker-dealer is unusual, it just feels a little heavy given that it carves out a significant portion of the company’s quarterly 10-K filing.

The company’s Q1 net loss was astonishing: $511 million. However, looking at the company’s net loss alone misses the full story.

Robinhood’s founders made the decision to cancel their 2021 market-based stock awards in the middle of Q1.

This will reduce the company’s share count and save the company $50 million in quarterly operating costs starting in Q2, but the cancellation has a massive financial impact in the present quarter in terms of the income statement. Robinhood made an effort to reconcile the loss we saw through its adjusted EBITDA, which came out in the positive after the equity-related adjustments.  

Aside from the Founder’s Award, Robinhood has stayed the course on buying back its own shares from the failed holding company of FTX CEO Sam Bankman-Fried. This purchase, along with the cancellation of the equity award, will help reduce Robinhood’s shares in circulation.

This could help Robinhood’s stock price, but with high interest rates coming to an end in the States, the company will have to dig deep to find its next value center.